Malaysian State Cited by Opposition Politicians as Model for Future

GEORGETOWN, Malaysia — Lim Guan Eng, the effusive chief minister of Penang state in Malaysia, is not the type to miss a good photo opportunity, so there were plenty of witnesses when he handed over the keys to his government-provided Mercedes before a May 5 general election.

Integrity is a central battle cry for Malaysia’s disparate three-party opposition as it pursues what appears to be its best chance yet of ending 56 years of rule by the Barisan Nasional, or B.N., coalition.

“The official cars should not be misused for our own personal use,” Mr. Lim, a 52-year-old ethnic Chinese, told reporters as his administration shifted to caretaker status this month. “This is the integrity held by the state administration.”

Five years after the opposition took control of four state governments, the changes in the northwestern state of Penang are being touted as proof that it can make Malaysia’s economy cleaner and more competitive.

Penang, which traditionally draws tourists to its beaches and the colonial elegance of its capital, Georgetown, topped the state investment league in Malaysia for the first time in 2010, and did it again in 2011, bolstering its position as a growing hub for high-technology manufacturers like Intel and Honeywell.

Overall investment in the state doubled from 2008 to 2012, compared with the previous four years, a powerful rejoinder to the B.N.’s claims that the opposition cannot be trusted to run the economy.

In response, the B.N., led by Prime Minister Najib Razak, says a 73 percent slump in Penang’s investment last year and mounting traffic congestion in the state are evidence that Mr. Lim’s touch is wearing thin.

But the opposition hopes Mr. Lim’s efforts to tackle corruption linked to laws favoring majority ethnic Malays will resonate with a younger generation of voters who are angry at graft and less attached to race-based politics.

Polls suggest a narrow victory for the B.N., which lost the two-thirds parliamentary majority that had allowed it to change the constitution for the first time in 2008.

The opposition’s “Penang model” also highlights risks to investors from an opposition victory, which promises to unravel five decades of cosy relations between the government and big business in what would be Malaysia’s biggest political shake-up since it gained independence from Britain.

Led by former Deputy Prime Minister Anwar Ibrahim, the opposition says it will review suspicious contracts and cancel some, including an $800 million rare-earths plant built by Lynas of Australia. Its manifesto also pledges to break up “monopolies” in certain sectors.

“We wouldn’t want to take any action that would destabilize the market, but at the same time it doesn’t mean they can get off scot-free, no,” Mr. Lim, who will campaign nationwide, said in an interview. “The imperative should be there are no crony-driven contracts.”

When Mr. Lim, who had been imprisoned for 18 months under draconian security laws in the 1980s, took office in Penang, he began a social and economic experiment that outraged traditionalists. For example, he made sure that state public works contracts were being awarded through open, computerized tenders, rather than direct negotiations.

Some portrayed it as a dangerous move to tear down the county’s system of affirmative action, introduced after race riots in 1969 between Malays and economically dominant Chinese. Mr. Lim says he was focusing on distortions in the policy that had enriched an elite few.

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The affirmative action program is credited with nurturing a Malay middle class, but so-called “bumiputras,” Malays and indigenous people, still make up the majority of low-income Malaysians. Economists say the policy has deterred investment and driven a brain drain, especially of ethnic Chinese, entrenching Malaysia’s “middle-income” trap.

The Penang reforms helped level the playing field for small Malay businesses, Mr. Lim said, enabling them to win contracts based on merit rather than connections. Smaller firms still have special protection because all contractors for “class F” jobs, those valued at as much as 200,000 ringgit, or $65,000, must be bumiputra by federal law.

Even for higher-value contracts, Mr. Lim said, Malay firms now win more than 70 percent of open tenders in Penang. State figures show the value of contracts won by bumiputra firms doubled from 2008 to 2011.

As he oversaw workers renovating a small Muslim prayer center in Georgetown — a job won through open tender — Ahmud Kairul Arif, 28, scorned the idea that as an ethnic Malay his business would need special help.

“There has been a shift which means we can compete against the Chinese,” said the graduate in project management. “I’m willing to go out from my comfort zone to compete.”

Mr. Najib, the prime minister, has said the opposition’s generous and sometimes vague campaign pledges, which include free university education and the abolition of road tolls, would explode the national budget deficit.

Mr. Lim said he had saved about 25 percent of state spending through cutting graft. Penang’s budget surplus grew 57 percent between 2008 and 2011, even as a chronic federal budget deficit pushed the national debt to 53 percent of the economy from 41 percent in 2008.

“It would be a model to say that if we are financially prudent, with a little money we can do a lot of things,” said Tony Pua, a leading opposition member of Parliament. “There’s a lot more we can do with the federal budget.”

Implementing Penang’s policies on the national level would not be straightforward. The three other states run by the opposition, including two by the Islamist PAS party, have had more mixed records on governance and transparency.

The state’s population of 1.6 million is evenly balanced between Chinese and Malays, whereas nationwide, Malays outnumber Chinese, 60 percent to about 25 percent, making changes in race laws more sensitive.

But Penang’s influence has already been felt at the national level, as the government has come under pressure to award more contracts through open tender and end what critics say are sweetheart deals with favored businessmen.

Rolling back privileges enjoyed by bumiputras — literally “sons of the soil” — would be political dynamite for Mr. Najib, who faces heavy resistance to reform.

In an interview with Reuters in March, Mr. Najib said that the “vast majority” of federal government contracts were now awarded through open tender, adding he made “no apologies” for some that are negotiated directly. “There are certain tenders that we carve out for bumiputra, but we would allocate that to the deserving bumiputra,” he said.